Educational Articles

Performance of the Model Portfolios: January, 2012

Charles Clark
| February 22, 2012

What follows is a review of the performances of Value Line’s four Model Portfolios for the month of January. The effects of recent market action and any changes to the Model Portfolios’ respective holdings are found in each week’s Selection & Opinion (free sample here). Portfolios I, II, and III share a common benchmark, the S&P 500 Index (adjusted for dividends), which rose 4.5% in January. Although each of the three portfolios benefited from the market’s upward move as 2012 began, only Portfolios I and III ended the month outperforming the S&P 500 Index. Meanwhile, Portfolio IV recorded its fourth consecutive gain in January, but the advance fell short of its benchmark, the Mergent Dividend Achievers (U.S. Broad), which rose 1.0%. (Read the description of each portfolio’s general investment strategy.)

Portfolio I reported a 8.0% gain for January, well ahead of its S&P 500 benchmark. As the month began, the portfolio benefited from investor support for its positions in the Auto Parts, Drug and Metal Fabricating industries. On the other hand, early commentary regarding the fiscal fourth-quarter (ended January 31st) performance of our holding in the Apparel business was initially not too well received, though support has since returned to this stock, and it was a solid contributor in January. Meanwhile, the portfolio got a respectable start to the earnings season, with the financial reports released in January generally making for good reading. The portfolio’s two top performing holdings for the month were stocks from the Metal Fabricating and Auto Parts industries, while the two worst hail from the Telecom Services and Shoe industries. There was one trade in January, wherein Kohl’s Corp. (KSS) shares were sold at a moderate loss and replaced by a member from the Wireless Networking business.

Portfolio II recorded a return of 2.6% for the month of January, short of its market benchmark. Nonetheless, the January performance made it four gains in a row for the growth and income portfolio. Although the overall quality of the group’s holdings and the resulting lower risk profile tend to set the tone for this portfolio, there were some strong performances delivered during the month, notably from the portfolio’s holdings in the Electronics, Basic Chemical, and Electrical Equipment industries. Meanwhile, our positions in the Integrated Petroleum, Beverage, and Drug businesses were a drag on the portfolio’s return. There were two trades in January. Medtronic (MDT) and BlackRock (BLK) shares were sold and replaced by holdings from the Food Processing and Retail/Wholesale Food industries. Moderate gains were realized on both sales.

Portfolio III posted a gain of 7.1% in January. The notable outperformance was preceded by a good showing in the final quarter of 2011, wherein the portfolio outdistanced its benchmark in the months of October and December. Meanwhile, January’s return was aided by strong market support for the group’s holdings hailing from the Auto Parts, Restaurant, Educational Services, and Steel sectors. On the other hand, investors were not impressed with the latest earnings report from our position in the Internet industry, and this holding ended up being the portfolio’s one notable decliner for the month. There were no trades in Portfolio III in January. Nevertheless, we remain on watch for quality companies whose stocks are selling at favorable prices relative to their underlying long-term growth prospects.

Finally, Portfolio IV registered a modest gain of 0.2% in January, short of its Mergent Dividend Achievers benchmark. Although the group’s concentration in high-quality, high-yielding stocks usually works to preserve capital, its holdings in the Electric Utility industry worked against this goal in January. Indeed, three of the five positions were off between 4% and 6% for the month, with a fourth falling some 1.6%. Meanwhile, price declines in our positions in the Drug, Food Processing, Tobacco businesses were also a drag on the portfolio’s performance. On the other hand, good showings from stocks hailing the Telecom Utility, Basic Chemical, and Property Management sectors were positives. We made no changes to the portfolio’s composition in January, though we are on watch for new ideas that will work well with the portfolio’s objective of generating current income. Despite the recent weakness in the portfolio’s electric utility holdings, Portfolio IV should remain of interest to investors focused on this objective. At some 5%, its yield on cost basis remains quite favorable.

Another year has begun, and Portfolios I, II, and III seem to have gotten off on the right foot. Meanwhile, although Portfolio IV had some difficulty as the year opened, we would caution making any judgments based on January’s performance. Indeed, at this writing in mid-February, Portfolio IV’s performance seems to have picked up a bit. Looking ahead from here, the prospects for economic expansion in the United States seem better than they were this time last year, notwithstanding the potential for a recession in Europe. Whether this forecast is realized and underpins favorable returns from investments in common stocks in 2012 is, of course, an open question. That said, the portfolios should continue to appeal to a range of investors with varying appetites for risk and return desiring exposure to the equity markets. Alternatively, the Model Portfolios can serve as a source of some of our best investment ideas.

As of this article’s writing, the author did not have positions in any of the companies mentioned.